CHAPTER # 14 Developing Pricing Strategies And Programs

SAJID MIR (MBA-III)

PRICING
Pricing strategy always has been more of a poker game than a science.
William T. Moran, Admar Research

Successful pricing is an art, not a science.

John I. Leahy, Black & Decker

Pricing decisions are not easy to make; they are often inherently soft.
William E. Johnson, William E. Johnson Assoc.

The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.

What is Price?

Price Has Many Forms

Rent
Fee Rate Commission

Tuition
Fare Toll Premium

Bribe

Salary

Wage
Interest Tax

Psychological Pricing
Reference Price
Price Quality inferences Price Cues

Psychological Pricing

Psychological Pricing
Used to play on consumer perceptions Classic example - 9.99 instead of 10.99! Links with value pricing high value goods priced according to what consumers THINK should be the price

Psychological Pricing
Most Attractive? A
32 oz.

$2.19

Better Value?

Psychological reason to price this way?

B
26 oz. Assume Equal Quality
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$1.99

Nine Price-Quality Strategies

Price Cues
Left to right pricing ($299 versus $300) Odd number discount perceptions Even number value perceptions Ending prices with 0 or 5 Sale written next to price

When to Use Price Cues

Customers purchase item infrequently Customers are new Product designs vary over time Prices vary seasonally Quality or sizes vary across stores

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Setting Pricing Policy

1. Selecting the pricing objective

Pricing Objectives
Survival Maximize Profits Maximize Market Share Maximum Market Skimming Product-Quality Leadership Partial Cost Recovery

Objectives Should Guide Strategy Planning for Price

Objectives Should Guide Strategy Planning for Price

 Maximize Profits
Attract new customers Maintain current customers Increase profit per customer Introduce new product

Generate cash Improve ROI

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Attract New Customers

Introductory coupons / discounts provide incentive maintain reference price Trial offers increase familiarity reduce risk Problem perceived as unfair
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Maintain Current Customers

Meet competition matching prices add to bundle (as long as customers want it!) Create barriers to exit contracts / subscriptions automatic billing phone numbers (no longer in the U.S.) family plans

Provide loyalty programs

frequent flyer Starbuck cards

Increase Profit per Customer

Increase prices
reduce product? (candy bar pricing) justify/ notify / base on costs

Adjust product mix

sales incentives for more profitable business

Adjust customer mix

teenagers vs. seniors

Charge for extras

whats valuable to customer and cheap to company

Get money up front

Prepaid subscriptions

Market Skimming
High price, Low volumes Skim the profit from the market Suitable for products that have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out) Examples include: Playstation, jewellery, digital technology, new DVDs, etc.

Many are predicting a firesale in laptops as supply exceeds demand.

Price Reductions to Increase Market Share

Skimming vs. Penetration

Other Price-Level Policies

Setting Pricing Policy

1. Selecting the pricing objective

2. Determining demand

Price Elasticity
Price elasticity is a measure of consumers price sensitivity

Even a crude estimate of price elasticity is useful input in pricing decisions

What will happen to my sales if I change my price?

What will happen if tuition is increased 10%?

Percent change in quantity demanded
Percent change in price

e=

Less Price Sensitive

Unique Value Substitutes
Less Aware Difficult to Compare

Expenditure to total income Expenditure to total cost

Cost borne by others Sunk investment Higher quality or prestige Perishable

Demand Curves Inelastic and Elastic

Estimating Demand Curves

Surveys Price Experiments Statistical Analysis

Price Elasticity of Demand

The percentage change in quantity demanded relative to a percentage change in price.

Setting Pricing Policy

1. Selecting the pricing objective

2. Determining demand

3. Estimating costs

Types of Costs
Fixed costs Variable costs Total costs Average cost Cost at different levels of production
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Types of costs levels of Production

TYPES OF COSTS
Variable Costs

Fixed Costs
Do not deviate as level of output changes

Deviate with changes in level of output

Total Costs
Sum of the Fixed and Variable Costs for a Given Level of Production

Cost / Unit at Different Levels

Cost per Unit

Quantity Produced per day

1,000

Accumulated Production

Accumulated Production

Target Costing
Target cost is the cost that can be incurred while still earning the desired profit
Selling price desired profit = target cost

The customer sets the price

Profit must be achieved through cost control
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Setting Pricing Policy

1. Selecting the pricing objective 2. Determining demand 3. Estimating costs 4. Analyzing competitors costs, prices, and offers

5. Selecting a pricing method

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Step 4: Analyzing Competitors Costs, Prices and Offers

Identify nearest price competitors Take competitors features and prices into account Make decision to charge more, the same or less than competitors Monitor competitors reaction to your pricing strategy
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STEP 5 Pricing Methods

Markup Pricing Target Return Pricing Perceived Value Pricing Value Pricing

Going Rate Pricing

Auction Type Pricing
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Value Pricing

Value Pricing
Price set in accordance with customer perceptions about the value of the product/service Examples include status products/exclusive products

Companies may be able to set prices according to perceived value.

Perceived Value Pricing Example

Caterpillar Tractor is $100,000 vs. Market $90,000 $90,000 if equal 7,000 extra durable 6,000 reliability 5,000 service 2,000 warranty $110,000 in benefits - $10,000 discount!

Going Rate (Price Leadership)

Going Rate (Price Leadership)

In case of price leader, rivals have difficulty in competing on price too high and they lose market share, too low and the price leader would match price and force smaller rival out of market. May follow pricing leads of rivals especially where those rivals have a clear dominance of market share Where competition is limited, going rate pricing may be applicable banks, petrol, supermarkets, electrical goods find very similar prices in all outlets.

Tender Pricing

ACTION Pricing
Many contracts awarded on a tender basis Firm (or firms) submit their price for carrying out the work Purchaser then chooses which represents best value Mostly done in secret TYPES OF ACTUIONS: English auctions Dutch Auctions Sealed-bid auctions #

Setting Pricing Policy

1. Selecting the pricing objective 2. Determining demand 3. Estimating costs 4. Analyzing competitors costs, prices, and offers

5. Selecting a pricing method 6. Selecting final price

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Impact of other marketing Activities

Company Pricing policies:Airlines Gain-and-risk-sharing pricing

Impact of price on other parties:OPEC

Price-Adaptation Strategies
Geographical pricing
Discounts/allowances Promotional pricing Differentiated pricing
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Geographical Pricing
BARTER COMPENSATION DEAL: BRITISH AIRLINE BUYBACK ARRANGEMENT: US.CHEMICAL COMPANY OFFSET

Price Discounts and Allowances

Quantity Discounts Cash Discounts Functional Discounts Seasonal Discounts

Common Tactics for Fine-Tuning the Base Price

ALLOWANCE Promotional Discount

Discounts and Allowances

Reductions from List Price
Cash discount: price reduction offered to a consumer, industrial user, or marketing intermediary in return for prompt payment of a bill
2/10 net 30, a common cash discount notation, allows consumers to subtract 2 percent from the amount due if payment is made within 10 days

 Trade Discounts: payment to a channel member or buyer for performing marketing functions; also known as a functional discount

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 Quantity discount: price reduction granted for a large-volume purchase

Justified on the grounds that large orders reduce selling expenses, storage, and transportation costs Cumulative quantity discounts reduce prices in amounts determined by purchases over stated time periods Non-cumulative quantity discounts provide one-time reductions in the list price

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 Allowances
Trade-in: credit allowance given for a used item when a new item is purchased Promotional allowance: advertising or promotional funds provided by a manufacturer to other channel members in an attempt to integrate the promotional strategy within the channel

Rebates: refund for a portion of the purchase price, usually granted by the products manufacturer
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Pricing Policies
Pricing policy: general guidelines based on pricing objectives and intended for use in specific pricing decisions Psychological pricing: pricing policy based on the belief that certain prices or price ranges make a good or service more appealing than others to buyers

Promotional Pricing
Loss leader pricing Special event pricing Cash rebates Low-interest financing Longer payment terms Warranties and service contracts Psychological discounting
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Loss Leader
Goods/services deliberately sold below cost to encourage sales elsewhere Typical in supermarkets, e.g. at Christmas, selling bottles of gin at 3 in the hope that people will be attracted to the store and buy other things Purchases of other items more than covers loss on item sold e.g. Free mobile phone when taking on contract package
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Differentiated Pricing
Customer segment pricing Product form pricing Image pricing Channel pricing Location pricing Time pricing

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Initiating and responding Price Changes

Price Cuts

Price Increases
Responding to competitors Price changes
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 Price discrimination: The use of different prices for different customers.

It is illegal if a price advantage is granted to one, but not another, where both compete and the articles are similar.

Granting promotional allowances must be done on a proportionate basis to all customers.

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 Competitive Pricing Strategy: reduces emphasis on price as a competitive variable by pricing goods at the general level of competitors
Firms focus their own marketing efforts on the product, distribution and promotion elements of the marketing mix

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Thank you